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For the purposes of the Takeover Code, Edison Investment Research is deemed to be connected with Low & Bonar. Under Rule 20.1 Edison must not include any profit forecast, quantified financial benefits statement, asset valuation or estimate of other figures key to the offer, except to the extent that such forecasts, statements, valuations or estimates have been published prior to the offer period (as defined in the Takeover Code) by an offeror or the offeree company (as appropriate) in accordance with the requirements of the Code. Consequently we have removed our estimates until the Offer Period ends.
Low & Bonar
May trading newsflow causes us to lower earnings estimates significantly. Improvements to operational performance and further de-leveraging are firmly on management’s agenda and the disposal of the construction fibres operation will help in the latter regard. Metrics point to attractions for deep-value investors.
Low & Bonar announced a fully underwritten £54m placing and open offer (c £50m net) alongside FY18 results. The new equity funding goes a long way towards resolving balance sheet net debt constraints and allows the relatively new management team to execute its updated strategic plan. Our revised estimates incorporate the funding effects, more gradual EBIT margin recovery and reset dividends in line with the stated policy.
Improving operating and financial performance and lower net debt are key management objectives. FY18 results should provide some evidence of progress here, although our revised estimates now contain lower margin and dividend expectations in all three forecast years. Balance sheet clarity and margin recovery will be key share price catalysts, in our view.
While volume growth is being achieved in several divisions, some of the factors that affected H1 trading – most notably higher input costs – have not receded as quickly as anticipated. Underlying operational improvements are happening but have not been enough to offset these pressures to date. We have lowered FY18 earnings expectations sharply – slowing the rate of net debt reduction a little – with a flat DPS profile now.
The new management team has a clear focus on improving financial and operational performance across the group and individual business units. H1 results bear testament to a number of challenges faced in the period but also showed signs that actions are beginning to take effect. We have reduced our EPS estimates (by c 20% this year, c 10% in the following two) to reflect more conservative margin assumptions.
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A new senior management team is in place with a clear agenda to improve operational and financial performance. FY18 is going to be a transition year but investors will still want to see evidence of progress from the two strongest business units and in addressing specific issues in the other two. We have not changed estimates at this stage, but note the increased H2 bias flagged by management. The attraction of the current valuation will depend on the level of investor confidence in underlying prospects.
Low & Bonar unveiled a measured action plan to deal with the issues demonstrated by its results. Management is reviewing the status of Civil Engineering and has restructured some of the business. It has identified production opportunities in CTT while acting to ensure that growth in B&I and I&T is sustainable. Critically, the company has committed to greater cash discipline, pointing to a significant reduction in net debt in the current year. While we have modestly reduced our forecasts for 2018 and 2019, our assessment of value remains positive. Using comparative ratios for EV/EBITDA, PER and yield, our theoretical value is 97p, comfortably ahead of the current level. In particular, the current yield premium does not adequately reflect the company%u2019s prospects.
A period of stability following management change and delivery on some flagged FY18 group projects would see a good return of interest to the fundamental Low & Bonar investment case, in our view. There are clear markers for tracking progress and, in the near term, a 3.3% yield with the expected final dividend payment is a clear attraction.
Not for the first time Low & Bonar is subject to significant change. The Civil Engineering division is being reorganised, a cost reduction programme is underway, a defined plan to reduce debt by £15m is also underway and Philip de Klerk has been promoted from FD to Chief Executive. We now expect a flat year in FY18, having previously expected good growth. We see the management change as positive and if the debt can be successfully managed down, we continue to see value within the Group. However, confidence rebuilding is clearly required and we await further detail at the analyst presentation and then later in the year. For now we remain at Hold with a reduced 56p price target.
The share price fell by almost 33.0% in Q4 2017 on the back of two trading updates and the departure of the CEO. Superficially, this appears consistent with reactions to similar announcements elsewhere in the market. However, we believe that the fall is an over-reaction and prefer to base our valuation on fundamentals. Specifically, relating the share price move to our downgrades to earnings implies a substantial de-rating which is not borne out by either the prospects for the bulk of the Group nor its ability to manage cash flow. On this last point, we continue to expect further progress in debt reduction, underpinning modest increases in the dividend across the timeframe. This is at odds with the current yield and is the basis for our theoretical value of 92p per share.
A year end update led to a c 5% reduction in our FY17 PBT expectation. More detail on trading performance will emerge with the FY17 results due on 31 January and we will review our group estimates fully at that time. Investors will look for signs of trading stability and prospective cash generation, while eyeing a dividend yield of c 6%. The search for a new CEO is unlikely to have concluded by then, in our view; the role is being covered in the short term by an experienced existing NED.
Disappointing demand in Civil Engineering (CE) markets causes us to reduce earnings estimates. Despite this, FY17 is expected to show good progress overall although the reduction in net debt from the half year will now be less than previously anticipated. Good underlying performances from three business units are being partly obscured by CE. Resolving this is likely to benefit group valuation in our view.
Civil Engineering has continued to see challenging markets and will now not be profitable this year; its viability is being reviewed by management. In addition raw material prices have remained higher than anticipated. B&I and I&T are performing well, while CTT is recovering; the Group will still make progress overall over last year but we have downgraded forecasts by c.7%. We reduce our target price to 75p and remain at Hold.
Good overall progress was achieved in H117 – although market conditions and business unit performance were somewhat mixed – and full year expectations are unchanged. A business strategy of increasing focus on better performing niche markets and margin enhancement is consistent with our double-digit earnings growth expectations. The rating acknowledges this and perhaps anticipates further improvement.
In a brief AGM statement, management stated that FY17 was off to a good start with unchanged guidance for the year. There is tangible evidence of strategic actions and their benefits extend beyond the current financial year. Low & Bonar’s share price has picked up recently and is beginning to acknowledge the company’s growth prospects.
The FY2016 results for Low & Bonar were ahead of our estimates despite the underperformance of the CTT division, which had been flagged early in the year. The other three divisions generated strong constant current profits growth, through a combination of organic revenue increase and margin improvement. There is clear evidence that strategy to focus on higher margin markets at the expense of commodity businesses, or areas in which it does not have a strong market position, is now gaining traction. The company has further potential to leverage its manufacturing expertise and intellectual property in order to expand through a combination of organic growth and selective M&A activity. The new Colback plant in China is performing well and will be expanded this year. The current rating still reflects the Group’s historic trading difficulties and the subsequent uncertainties over the new management team with a revised strategy. However, recent evidence suggests that a more optimistic view is now appropriate.
FY16 was a year of good underlying progress diluted by one underperforming business unit. We believe that FY17 is likely to more clearly demonstrate gains from strategic and operational execution, as seen in our upwardly revised estimates. Consequently, we expect the re-rating that began a year ago to continue.
Significant investment activity, business portfolio management and more favourable financing have all been prominent features in the year to date, with group EBIT progress also delivered in H116. We expect Low & Bonar to deliver solid H2 performance and to continue its strategy of business improvement. Our estimates are modestly higher in the current year, more so in the following two and the FY17e P/E is now below 10x with a dividend yield of c 5%.
The disposal of the Sports and Leisure yarns business is proof that Low & Bonar is intent on delivering its strategy to focus on higher margin markets at the expense of commodity businesses or areas in which it does not have a strong market position. The results for the first half demonstrated that there is now solid potential growth in most areas of operation as European markets continue to stabilise. The company has the potential to leverage its manufacturing expertise and intellectual property in order to expand through a combination of organic growth and selective M&A activity, The current rating is still reflecting historic trading difficulties and the subsequent uncertainties of a new management team and a revised strategy. However, there was sufficient evidence in recent results to suggest that a more optimistic view is now appropriate.
Yesterday’s results demonstrated that the revised strategy is working; the trading performance was generally strong and the troublesome Yarns business has gone. Frustratingly, production issues at CTT took the gloss off strong performances from the other three divisions. The weakness of sterling boosts the outlook and we upgrade FY17 PBT by 7%, although higher tax dampens the EPS upgrade (1%). Of course, the wider impact of Brexit remains an unknown, but we continue to support management’s strategy to enhance the product portfolio and focus on higher margin areas. We retain our 81p target price (c.12x FY17) and Buy recommendation.
Mixed market conditions and FX movements provided a challenging backdrop to FY15 trading, but Low & Bonar delivered the expected progress. Improving profitability from core operations in FY16 is likely to come mainly from well-flagged internal initiatives, in our view. We have trimmed estimates modestly, including a lower JV contribution. The P/E rating is sub-10x from FY17 and suggests that translating strategic change into faster earnings growth would be a catalyst for outperformance.
The first results of the new five year planning period were encouraging. The company has demonstrated that it has the potential to leverage its manufacturing expertise and intellectual property in order to expand its presence in higher margin niche markets and extend its global reach. There are still significant economic headwinds and potential implementation risks attached to the new strategy but, through a combination of organic growth and selected M&A activity, there are grounds for future optimism. The current rating is still reflecting historic trading difficulties and the subsequent uncertainties of a new management team and a revised strategy. However, there was sufficient evidence in the FY2015 results to suggest that a more optimistic view is now appropriate.
In terms of results, FY15 was a year of consolidation, with the more important factor being the revised direction under new Chief Executive Brett Simpson. The new strategy is starting to take shape despite challenges caused by European civil engineering weakness and the Saudi JV. We have upgraded FY16 PBT by 2%, with potential for currency benefit on top of that, and foresee 9% PBT growth into FY17. We continue to feel that latent value can be extracted and that this should be an opportune time to invest on a P/E of c.10x and at a point where the new initiatives should be starting to gain traction. We retain our target price of 81p. Buy.
In terms of results, FY15 was a year of consolidation, with the more important factor being the revised direction under new Chief Executive Brett Simpson. The new strategy is starting to take shape despite challenges caused by European civil engineering weakness and the Saudi JV. We expect to slightly upgrade FY16 PBT, which is a positive sign in difficult markets. We continue to feel that latent value can be extracted; we await the analyst presentation but expect to retain our Buy recommendation and 81p target price
As it approaches the end of FY15, Low & Bonar has confirmed that it is trading in line with existing market guidance and, consequently, our estimates are unchanged. We believe that the benefits of organisational change and investment will become increasingly apparent in FY16 and be attractive to growth-oriented investors.
It is encouraging that trading remains in line with expectations, despite the difficult economic conditions being experienced by many at present. As we have said previously, in terms of results, FY15 is a year of consolidation, with the more important factor being the revised direction under new Chief Executive Brett Simpson. Activity remains low in European civil engineering markets, but we continue to feel that latent value can be extracted from the Group and retain our Buy recommendation and 81p target price.
Low & Bonar (LWB LN) Trading in line | OMG (OMG LN) Full year outlook confirmed | Redde (REDD LN) Strong start to FY16, income attractions remain | Skyepharma (SKP LN) Supportive GSK Q3 2015 results
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A capital markets day (CMD) earlier this year refreshed Low & Bonar's (LWB) existing group strategy and laid down longer-term management aspirations for accelerated growth under a new organisational structure. Subsequent to the CMD, FY15 guidance was reiterated with H115 results. The share price has seen a partial re-rating this year and, with rising earnings expectations, there is scope for this to continue, in our view.
Delivering double-digit earnings progress in H115 was a fair achievement in mixed market conditions. Four out of five global business units (GBU) raised EBIT in local FX and currency had a net neutral impact on results overall. Business investment is ongoing, we expect end-FY15 net debt to come in below £100m despite further significant spend in H2. A FY15e P/E of 12.6x and dividend yield of 3.9% offer investors a balanced growth and income rating.
As we have said previously, in terms of results, FY15 is a year of consolidation, with the more important factor being the revised direction under new Chief Executive Brett Simpson. The interims are in line with expectations (no change to forecasts) and reflect the ongoing low activity in European civil engineering markets. However, we feel that latent value can be extracted and retain our Buy recommendation and 81p target price.
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